Spend or Save? What to Do Once You Start Making More Money
April 18, 2016 | Your Finances
Since you got your first job, you’ve likely been pinching pennies, whittling away at your debt and trying to save for the future. After a promotion or two, you’re finally making more money, and your budget has some breathing room. So what should you do with that additional money?
“Being responsible with money means being in control of it,” said Claudio Gambin, a financial advisor with Northwestern Mutual. It can be easy to start spending all the additional money you have coming in. “But if you don’t discipline yourself early, you’ll always live paycheck to paycheck.”
Here are four tips to help you take control of your money so that you can enjoy what you’re earning while still growing and protecting your assets.
1. Envision your future. It can be difficult to prioritize from a financial perspective if you haven’t set goals for what you want to do with your money. Do you want to buy a car or house? Do you want to travel? Do you have or want kids? Do you want to dedicate a portion of your income to charity? Your goals will help guide your spending and saving decisions.
Once you figure out what’s important to you, then you can start to budget and save based on those goals.
2. Splurge and enjoy (some of it). While it’s important to set aside money for the future, it’s okay to spend some of your extra income on yourself now. But be careful—make sure you set limits. Gambin recommends giving yourself an allowance, like you got as a kid, for the things you want.
If you tend to spend money as soon as you have it, give yourself a weekly allowance rather than monthly so that if you deplete your funds, you have to make it through only a couple days, not weeks. Learn more about how to set a budget by downloading Northwestern Mutual’s free guide: Your Guide to Money Management.
3. Make saving a habit. Gambin compares saving money to working out. When you join a gym on January 1 and work out every day for two weeks, you will be sore, exhausted and more likely to fall off the wagon. But if you start slow and work your way up, you’ll build a habit for life.
Start by saving a percentage of your income. Over time, increase that amount regularly, such as when you get a raise. If you get unexpected money, like a tax refund, gift or bonus, consider saving a portion of it.
If you don’t already have one, create an emergency fund. Gambin recommends saving at least six months of living expenses to cover emergencies like medical bills or car repairs. If you dip into your emergency savings, refill it before saving elsewhere.
If you’re not already saving for retirement, start. And if you are, try to increase the amount you’re saving on at least a yearly basis. If your employer matches 401(k) contributions, try to save at least the amount that is matched so you don’t leave free money on the table.
Next, begin saving for short- and middle-term goals. Your short-term savings would be for purchases in the next year, such as a vacation. Your middle-term savings would be for purchases in the next 5 to 10 years, such as a home.
4. Protect yourself. Make sure the unexpected doesn’t derail your goals. You probably have car insurance to protect you if you’re ever in an accident. If you own a home, you likely have insurance for that as well.
But what if you became disabled and couldn’t work? Most employers offer disability income insurance to help pay expenses if you become disabled. But employer plans often cover only a percentage of what you were making.
Gambin recommends considering the purchase of additional disability insurance. “Your ability to make money is your number one asset,” Gambin said. In the same way that homeowner’s insurance protects your home, disability income insurance protects a portion your paycheck.
Do you have employer-sponsored life insurance? How much does it cover? Even if you don't have a spouse or children, you’ll want enough to pay off your debts and cover funeral expenses. You may also want to consider permanent life insurance, which builds cash value that can eventually become a source of funding for emergencies or even retirement if the death benefit is no longer needed
It’s a great feeling when you advance in your career and have more money coming in. And while it’s nice to spend and enjoy some of those extra dollars, it’s also important to create strong financial habits that will put you in a good financial position for years to come. A financial professional can help you translate your goals into dollars and create a financial plan that can help you achieve them.
By being deliberate about how you spend and save the additional money you have coming in, you can confidently enjoy what you’re spending today, knowing you have planned for the future.